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CS Professional · Banking and Insurance - Laws and Practice · Performing and Non Performing Assets

Gopal Engineering's term loan of Rs 10 crore was classified as NPA in the books of Union Trust Bank. Before classification, the bank had accrued interest income of Rs 18 lakh on the account, of which Rs 6 lakh was received in cash and Rs 12 lakh remains uncollected. In the year of classification, what is the correct income recognition treatment of the uncollected interest?

The bank must reverse the uncollected Rs 12 lakh from income and recognise interest on this account only when actually received. Interest on NPAs is booked on a cash basis. The Rs 6 lakh already collected stays as income, so reversing the full Rs 18 lakh would be incorrect.

  1. ARetain the Rs 12 lakh as income since it was accrued earlier in the year
  2. BReverse the Rs 12 lakh from income and recognise further interest only when actually receivedCorrect
  3. CReverse Rs 18 lakh in full, including the cash received
  4. DConvert Rs 12 lakh to a provision without changing income

Explanation

Under the income recognition norms, once an account becomes NPA, interest accrued and credited to income but not collected must be reversed or provided for, and further income is booked only on realisation. Rs 6 lakh actually received stays as income. Reversing Rs 18 lakh wrongly reverses income that was actually collected.

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